Non-Compete and Seller Liability After Selling a Business in Ontario

Closing a sale does not always end your involvement. The purchase agreement may restrict you from competing, and it may leave you answerable for statements you made about the business.

This article explains the main ways a seller can stay exposed after closing and what to look for before you sign. It is general information, and a lawyer should review your actual agreement.

How a sale-of-business non-compete works

A non-compete is a promise by the seller not to run or help a competing business for a set time, in a set area and in a defined line of business. Buyers want it because they are paying for goodwill and customer relationships that you could otherwise walk away with.

Whether a court would enforce a particular clause depends on its wording and the circumstances, including how long it lasts, how wide the area is and how broadly it defines the competing activity. Comparing the clause with what the buyer actually bought is a sensible starting point, but how it applies depends on your situation, so it is worth confirming with a lawyer. Because the outcome turns on facts, have a lawyer review the scope before you agree.

Representations, warranties and indemnities

Representations and warranties are statements you make about the business, such as that the financial statements are accurate, taxes are paid and there are no hidden claims. An indemnity is a promise to compensate the buyer if those statements turn out to be wrong or certain things go wrong.

• Check whether your liability is capped at a stated amount
• Check whether there is a minimum claim size before the buyer can claim
• Look for knowledge qualifiers, such as 'to the seller's knowledge'
• Find out how long each warranty lasts after closing
• See whether part of the price is held back to cover claims

Each of these points is negotiable. Narrow statements, caps and time limits all reduce your exposure.

How long a claim can be brought

Claims under a business sale agreement are generally subject to Ontario's Limitations Act, 2002. A proceeding cannot be started after the second anniversary of the day the claim was discovered, unless the Act provides otherwise. No proceeding can be started after the 15th anniversary of the act or omission it is based on, regardless of discovery.

Parties to a business agreement made on or after October 19, 2006 may vary or exclude limitation periods, which lets a share or asset purchase agreement set its own survival period for representations and warranties. A business agreement is one where none of the parties is a consumer under the Consumer Protection Act, 2002. In practice, the survival period you sign is often what counts, so read it closely.

Taking back part of the price

If the buyer pays part of the price later, you become a lender. Under the Personal Property Security Act, registering a financing statement perfects a security interest in any type of collateral, so you can register your security over the business assets. If you do not, and the buyer becomes insolvent, an unperfected interest is not effective against a trustee in bankruptcy and you may rank as an unsecured creditor.

A registration is effective only during its registration period, so you must renew it before it expires if the loan is still outstanding. If the buyer defaults and you intend to dispose of the collateral, you must generally give at least fifteen days' written notice to the debtor and certain other interested persons. The buyer may redeem the collateral before you dispose of it by fulfilling all obligations secured and paying your reasonable enforcement expenses.

Tax matters too. Where part of the price is not payable until after the end of the tax year, you may claim a reasonable reserve, and the whole gain is generally taxed over no more than five years. When qualified small business corporation shares are sold to your child who was resident in Canada immediately before the sale, the period can stretch to up to 10 years.

What to do next

• Ask for the draft agreement early and read the non-compete and indemnity sections first
• Negotiate the scope, length and area of any non-compete
• Seek a cap, a minimum claim size and a clear survival period for warranties
• If you are financing the buyer, register your security and diarize its renewal
• Keep your records of the business, since you may need them to answer a later claim
• Have a lawyer and an accountant review the agreement before you sign

Frequently asked questions